Question

Njenge is a special purpose vehicle set up by the Football Association of Zambia (FAZ) and the National Sports Council of Zambia (NSCZ) to undertake a project to manufacture an innovative muscle toning device (Muleza) that will be used in the treatment of sporting injuries. It is expected advances will bring more sophisticated zero. K8, 000,000 has been spent in developing and testing the device over the past year. Initial market research has been conducted at a cost of K2, 500,000 and is due to be paid shortly. The market research indicates the following demand and selling price per unit: that the commercial life of the Muleza will be four years after which technological devices to the market and the sales will fall to virtually Year (from now Units demand Selling Price 2,000 70,000 125,000 20,000 K2, 000 K2, 200 K1, 600 K, 400 A factory will be built for the production of the Muleza for K30, 000,000 and will take a year to complete. Payment will be made in two instalments; the first instalment of K18, 000,000 is payable immediately and the remainder in a year's time. The factory building is expected to be sold for K25, 000,000 when the production and sales cease. Machinery costing K16, 000,000 will be installed at the end of the first year. The machinery wil be depreciated on a straight-line basis over the next four years and is expected to have a nil value at the end of the four years. At present the materials cost of making one Muleza unit is K200. Njenge has enough materials in stock to make 1,500 units, which it had purchased a year ago for K450 per Muleza unit. If the does not go ahead then these materials will be sold for an equivalent of K120 per Muleza unit. Labour that will be used to make the Muleza is to be made redundant immediately at a cost of K2, 000,000 if the project does not go ahead. Labour costs per unit are K250. It is expected that once the project is completed, the labour will be made redundant at a cost of K3, 500,000. Fixed production overheads relating specifically to the production of the Muleza are expected t r annum and variable production overheads are expected to be Kiso per

Answer 1

	Y-1	Y0	Y1	Y2	Y3	Y4	Y5
Factory Production Cost		-18,000,000	-12,000,000					It takes one year to complete, hence Y0 end and Y1 end of payment, thus Year 1 is the factory completion time
Development and Testing	-8,000,000							Has already been spent
Market Research		-2,500,000						Since it is to be paid shortly ie along with mostly first installment
Machinery Installment			-16,000,000
Salvage Value							25,000,000
Units Demanded (U)				2000	70000	125000	20000
Sales Price (S)				2000	2200	1600	1400
Revenue (R ) = (U)*(S)				4,000,000	154,000,000	200,000,000	28,000,000	Revenue = Sales * Units demanded
CoGS				-325,000	-49,000,000	-87,500,000	-14,000,000	In first year, 1500 units at 450 and after that all units at 700 cost
Labour Cost				-500,000	-17,500,000	-31,250,000	-5,000,000	labour = unit labour cost * Units
Cost of Redundancy							-3,500,000
Fixed Overheads				-13,000,000	-13,000,000	-13,000,000	-13,000,000
Variable Overheads				300,000	10,500,000	18,750,000	3,000,000	Variable = Per Unit * no of units
Admin Costs				11,500,000	11,500,000	11,500,000	11,500,000	= 17M- allocatoin of 5.5M , needs to be removed since this is an allocatoin and a sunk cost
Depreciation								No need of capturing since it is a non cash expense and since tax ignored, hence no impact on cashflows
Working Capital				-10,000,000			10,000,000
Total Cash Flows	-8,000,000	-20,500,000	-28,000,000	-8,025,000	96,500,000	98,500,000	42,000,000	Add all the cash Flows
NPV	92,526,009.60
IRR	49.04%